We refinanced our mortgage in January, and that meant we got a new lender. In today’s mail was an invitation to enroll in the lender’s biweekly payment plan which “does the work” to help me pay off my loan faster by automatically deducting half of my regular monthly payment every 14 days. The way the math works out, I would end up making 13 “full” mortgage payments each year, theoretically without feeling any pain. According to my lender’s calculations, I would pay off my loan 4 1/2 years earlier and save over $34,000 in interest.

Um, no thanks. I can manage that “work” on my own perfectly fine. I’ve planned all along to pay extra principal each month, and now I plan on rolling my debt snowball into the mortgage once my student loan is paid off. That’ll result in the mortgage being paid off 23 1/2 years early and over $100,000 saved in interest.

What really staggered me was the cost of the biweekly mortgage plan. The lender must make a fortune off of anyone who signs up. There’s a $375 enrollment fee, plus a $1.50 transaction fee with each payment. With 26 payments, that’s an extra $39 each year!

I hope no one pays these fees, because they’re outrageous. In these economic times, you’d think lenders would actually just be grateful to have a customer who pays on time!

We are very close to paying off my remaining student loan, which would leave us with the mortgage as our only debt. For some reason, I had assumed until today that we would shift what we’ve been paying on the student loan into savings for retirement and the kids’ education. It had simply never occurred to me to wonder how long it would take to pay off the mortgage if we continued the debt snowball.

Until today.

Out of nowhere, I began to wonder would happen if we applied the student loan payment to our mortgage. I was shocked to see that we could pay off our mortgage in just over six years.

So that’s the new plan: Pay off the mortage by mid-2015. We’ll save over $100,000 in interest. I was a little concerned that with our new plan, refinancing in January may have cost us money, but I’m happy to report that we’ll come out ahead by $5,000 (i.e., if we hadn’t refinanced and started accelerating the mortgage in a few months, we’d have paid $5,000 more than we will now).

Of course, nothing is set in stone. The new plan presupposes that we’ll be sending the boys to public elementary school or a very affordable private school, and that my husband and I will hold on to our jobs. With the current state of the economy, I don’t want to take anything for granted. But even with the extra principal payment each month, we’ll still be able to save, as we have done while paying off our non-mortgage debts, so we will remain financially stable.

We’ll be re-financing at 5.125% or lower. Thanks to some special programs that we’re eligible for, we got a low rate with a 60-day lock and two float downs, so if rates go down between now and when we close, we’ll be able to get that lower rate. The loan officer said she thinks rates will go down in the next few weeks, so I took her advice and took the 60-day lock at 5.125% instead of a 30-day lock at 5% with no float down.

Calculating whether the refi would be worthwhile involved enough numbers to make my head spin, but the loan officer ran the numbers with me a second time and confirmed my conclusion. A key factor in making the refi worthwhile is our commitment to continuing to make our current monthly payment even though the minimum payment will be lower with the new loan.

Here’s an example of the math (I’m using round numbers for the sake of privacy and convenience – and remember, if the balances seem high, they’re normal or even on the low side for Southern California):

Current mortgageCurrent balance: $230,000Current interest rate: 5.75%Current monthly payment: $1460Interest paid to date: $78,300Interest that would be paid over life of the loan: $275,215

New mortgageBalance including closing costs: $235,000New interest rate: 5% (I’m gambling that it will go down at least this much)Interest paid over the life of the loan making the same monthly payment as above: $175,740Total interest paid on this loan plus interest paid on previous loan: $254,040

Difference in interest paid between the two loans: $275,215 – $254,040 = $21,175

So that’s a savings of $21,175 in this example, and the loan will be paid off in 25 years instead of 30. In our case, the numbers work out to a savings of about $30,000 over the next 22 years, and we’ll still pay the mortgage off two to three years before our current mortgage (assuming no extra principal payments).

Of course, we can always increase our savings by paying more extra principal each month, and it’s likely we’ll do that. Still, I can’t help but wish the savings were greater (and they may be if the mortgage rate goes down further before we close). But in any event, for just a few hours’ investment, we’ll have saved ourselves $30,000.

As I mentioned last week, I’ve been thinking about reducing my retirement savings and using the money to pay off debt instead. We’ve decided to go ahead with the plan, and I’m very excited about it.

It wasn’t an easy choice to make. The standard advice during tough economic times – especially for folks like us who have decades until retirement – is to keep up with retirement savings. And we are big believers in saving for retirement. We are committed to not being a burden to our children in our old age, and to retiring with enough years and money to fully enjoy ourselves.

However, I’m confident that the choice we’ve made to reduce our retirement savings for a year is the right one for us. The money will be redirected toward paying off my student loans, which will be paid off in full in a year – leaving us with only the mortgage as our debt.

One reason I say this is the right choice for us is the psychological benefit. I can’t tell you how excited I feel about having zero non-mortgage debt.

Another reason this is the right choice for us is the financial freedom we’ll gain from paying off my loans. The monthly payment we make is pretty substantial, and we’ll be able to redirect all of those funds into other financial goals. Like retirement. Or saving for college. Or paying for private school, should we decide to go that route.

A third reason to opt for paying off my loans right now is the guaranteed 4.5% rate of return. In this economic climate, that’s pretty tough to beat.

And the fourth reason for paying off my loans is the strong likelihood that any money we invest in the market right now will lose value. And there’s a very real possibility, if not probability, that it will not have regained its value by the time my loans are paid off. As Janette mentioned on my last post, I could park the money in a money market fund until the market recovers, but by then, I will have paid off my loans and be in a position to invest more than the contributions that I won’t be making.

There are a couple of points I want to make, though. First, we’re still saving for retirement. We’ll just be saving a little less.

And second, this is what’s right for us. As demonstrated by the comments of Mercedes, Janette and Tony’s Mom on my last post, it’s not the right decision for everyone. The retirement vs. pay off debt debate is one that’s frequently addressed in the personal finance blogosphere, and for good reason. The decision on how to prioritize is an individual one.

I know one thing, though: I can’t wait to be debt-free!Image credit: Yahoo! Finance.

I haven’t talked about it much, but that doesn’t mean I’m unaware of the current financial crisis our country is going through. I was initially planning to write about how I’m ignoring the meltdown and plugging along because I have faith that eventually things will turn around. But then I realized that it’s not quite true.

I do have faith that things will eventually get better. That much is true. But it does appear that in the short term, things are going to stay bad and probably even get worse.

What isn’t true about my original statement is that I’m ignoring what’s happening in the economy. For one thing, I’ve already reacted by spreading my money around. Instead of keeping almost all of our funds at one bank, we’ve transferred enough money to cover a couple of months’ expenses to two other banks. I hate the added complication to keeping track of our money, but the peace of mind is worth it.

Another thing I’m thinking of doing is stopping some (not all) of my monthly retirement contributions and using that money to pay off my student loans instead. It would accelerate the payoff date to sometime next year, which is tantalizingly soon. It would mean a guaranteed return of 4.5% after taxes. But it would also mean risking a (small) percentage of my retirement savings if the market turns around in the next year (although I could cut the payments and increase my contribution whenever I want to).

I’m also keeping a close eye on mortgage rates again. With the Fed rate cut earlier this week, I’m hoping that rates will go down enough to make refinancing worthwhile. We’ve been in our house for long enough and have a low enough rate that rates would have to get absurdly low for us to benefit while still making the regular monthly payment. But if we are able to refinance to a lower interest rate and continue making the same payment that we’re currently making, then we would be able pay off the mortgage faster and save tens of thousands of dollars in interest over the life of the loan.

Are you doing anything to respond to current economic conditions, and if so, what?

As I mentioned yesterday, we were able to pay off our car loan less than two months after we bought the car. One reason we were able to achieve this is because we were setting a substantial amount aside in savings each month specifically for the car purchase. But now that the car is paid off, I thought I’d mention some of our other financial goals and how we’re going to get there.

The first thing we are going to do is continue saving for a new car. That might sound strange, considering that we just bought one. But we’ve decided that we never want to take out a car loan again. Every car we buy from now on will be paid for with cash. Our next car purchase should be in about five years, and we’ll probably spend about the same amount of money. Saving $325 per month for the next five years will give us $19,500 plus interest. We should be able to pay the remaining cost of the car with the trade-in value of our current car and additional savings. I’m not contributing more to the car fund because . . .

I am also significantly increasing the extra amount that we pay on my student loans each month. At this rate, my loans should be completely paid off in less than two years.

Finally, I am increasing the amount we put into “regular” savings each month. In addition to what I have budgeted, I’ll be snowflaking all extra income into our savings. This savings is money that will pay for our vacation in Las Vegas in the fall (we’re going for a relative’s wedding), as well as any other unexpected expenses that arise. Once we’ve saved a substantial amount, I’ll use the money to make a large principal payment on my student loans, and then we’ll start over with the savings. (Note: This isn’t our emergency fund, which will remain untouched.) While I could put this money toward my student loans to begin with, I like having the extra cushion in my savings account. (Especially since we have talked about installing a new air conditioning system, which would run about $3500.)